THIS REPORT CONTAINS ASSESSMENTS OF COMMODITY AND TRADE ISSUES MADE BY

USDA STAFF AND NOT NECESSARILY STATEMENTS OF OFFICIAL U.S. GOVERNMENT

POLICY

Date:

GAIN Report Number:

Approved By:

Prepared By:

Report Highlights:

China’s fuel ethanol production is forecast to reach 2,217 million liters (1.75 million tons) in 2011, an increase of

four percent compared to 2010. Although the ethanol sector only accounts for one percent of China’s total

grain production, this sector has been criticized for contributing to China’s escalating food and grain prices.

Realizing a need for sustainable feed stock for bio-fuel production, the industry is developing alternative feed

stocks such as energy forestry for biodiesel production and partnering with international organizations on

research and development of second generation cellulosic ethanol.

Ryan R. Scott and Jiang

Junyang

Ralph Bean

2011Annual Report

Biofuels Annual

China - Peoples Republic of

11039

7/21/2011

Required Report - public distribution

Post:

Executive Summary:

China’s fuel ethanol production is forecast to increase by four percent to 2,217 million liters (1.75 million tons)

in 2011. China’s five ethanol plants use grain (corn and wheat) and tuber (cassava) for ethanol production.

Over the past few years, China has been actively experimenting with non-grain feed stocks such as cassava and

sweet sorghum for ethanol production. Due to China’s rising food prices, the government stopped approval of

new fuel ethanol plants and fell short of reaching its production target in the 11th five year plan (2005-2010).

There is no specific production target for fuel ethanol or biodiesel production for the 12th five year plan (2011-

2015) period. A goal for China’s bio-fuel policy is to become less reliant on foreign oil, so imports of bio-fuels

and its feed stocks are currently not encouraged.

Production:

Ethanol: China’s five ethanol plants use grain (corn and wheat) and tuber (cassava) for ethanol production. In

2010, four of the plants produced a total of 1,951 million liters (1.54 MMT), which included 80 percent from

corn and 20 percent from wheat and rice. The cassava plant is estimated at 177.4 million liters (140,000 MT).

Although the government mandates that 10 provinces implement an E10 program (10 percent ethanol blended

into fuel), industry sources stated that the blending rate is within the range of 8-12 percent, depending on the

market prices between fuel ethanol and petroleum. With rising prices for feed stocks and the lack of sufficient

government support, ethanol producers lowered the blending rate to help offset cuts in their profit margin.

The official government guideline for the bio-fuel sector remains unchanged. As noted in last year’s Annual

report, bio-fuel development (including fuel ethanol and bio-diesel) should not compete with crops intended for

human consumption; and, the land for developing feed stocks should not compete with land for (food or feed)

crop production. The government and the industry have been experimenting with alternative crops such as

sweet sorghum and cassava for new ethanol plants.

Biodiesel: In 2010, China’s capacity for bio-diesel production is estimated at 3.408 million liters (3 MMT),

unchanged from the previous year; but, actual biodiesel production only reached 227.2 million liters (200,000

MT). Currently, the main feed stock for biodiesel is used/waste kitchen oil or residue from vegetable oil

crushers. Due to high demand from animal feed or other chemical processing sector, the prices for these feed

stocks are too expensive for biodiesel production. The restaurant and catering industry is another competitor

for waste cooking oil as it’s used as a substitute when prices for edible oil are relatively high. The renewable

energy often loses when competing against a need for human consumption in China.

As the government continues to control the price of transportation fuel, there will be a fixed price ceiling for bio

diesel. With production cost for biodiesel higher than regular diesel and the lack of government subsidies for

Beijing

biodiesel production, industry sources reported that some biodiesel producers stopped their operations. To

develop bio-diesel feed stock, several government agencies and state companies have begun planting energy

trees that bear oil nuts for bio-diesel production, but, progress has been slow and it will take years before these

energy trees reach a growth stage suitable for industrialization of bio-diesel production.

Due to scarcity of feed stocks for bio-diesel production, China has not mandated bio-diesel use for

transportation fuel nationwide. Earlier this year in Hainan province, there was a pilot program in two counties

where the blending rate of 2-4% was used for biodiesel in transportation fuel. The provincial government and

petroleum companies are still evaluating the results, which will determine the announcement of implementing

the mandatory use of biodiesel in Hainan. Two factors will determine if Hainan will impose a mandatory

program for biodiesel usage: the level of sustainable supplies from feedstock production and favorable subsidies

provided by central or provincial governments. (See Policy)

Policy and Programs for Ethanol Production:

Reportedly, for the 12th five year plan (2011-2015) period, the government has set a target for non- fossil

energy consumption at 11.4 percent by 2015, an increase of 3.1 percent from 2010. China aims to account for

15 percent of energy consumption with non-fossil fuels by the end of 2020. The targeted non-fossil energy in

China includes hydropower, solar energy, wind power, and biomass energy. According to the 2010 Energy

Yearbook, China’s reliance on foreign oil increased 2 percent to 55%, so they are diversifying their energy supply

and consumption mix. Compared with other renewable energy sources, bio-fuel is expected to take a minor

part in China’s diversified energy policy because of lack of sustainable supply of feed stocks and technology

breakthrough.

The government continues to provide subsidies for fuel ethanol production to all five designated ethanol plants

within the 10 mandated provinces. The central government’s average subsidy for fuel ethanol production is

slowly moving downward. In 2010, the average subsidy was 17 cents/liter ($215/MT); in 2009, 19 cents/liter

($241/MT); and, in 2008, 20 cents/liter ($253/MT), which was the highest in the past five years. Government

subsidies for fuel ethanol production have been criticized and held accountable for rising food and grain prices.

Some extreme criticism urges the government to abolish subsidies. Subsidy adjustments reflect current

production cost and price changes to feed stock and gasoline prices. Since 2008, the government has

implemented a flexible subsidy program for all five fuel ethanol producers. The program’s subsidy level is based

on the actual evaluation of each individual plant’s performance, which is scheduled in November of each year,

and designed to make more efficient use of government funding to the sector.

The GOC is revising the 2011 Foreign Investment Guidance Catalogue. According to China’s Ministry of

Commerce, new investments on liquid bio-fuel (fuel ethanol and bio diesel) plants should continue to be

controlled by the Chinese government. There has been no foreign investment in the current five ethanol plants

and all of them are 100 percent state owned, indicating a government’s preference for state ownership over the

private ownership in the energy sector. This policy is unchanged from the previous catalogue issued in 2007.

Policy and Support Programs for Bio-Diesel Production:

In 2010, the government announced its Diesel-Engine Fuel Blend Standard (containing 5% Biodiesel -- B5). This

national voluntary standard was implemented on February 1, 2011. The standard serves as technical criteria for

production and usage of biodiesel and promotes a healthy and orderly development of the sector. According to

industry contacts, Hainan province is the first pilot province to use B5 in 2011. Currently, there is a bio diesel

plant operated by CNOOC (China National Offshore Oil Company) with an annual capacity of 60,000 tons. This is

the largest demonstration project on bio diesel in China. As part of the province’s efforts in building an

international ecological island, the provincial government is planning to make B5 a mandatory standard.

Currently, B5 is only feasible in Hainan as the economy ranks far behind most of other provinces and its diesel

fuel demand is only 600,000 tons (as of 2007), the lowest in 30 provinces (excluding Tibet), according to China’s

2008 National Energy Yearbook. However, industry contacts report that due to the high demand and price for

feed stocks such as waste/used cooking oil, bio diesel production is not price competitive with regular diesel. As

a result, biodiesel producers are requesting subsidies to cover operational costs. A mandatory program for B5

must address the following: whether there are sustainable feedstock supplies of Jatropha or other oilseeds (not

competing with human consumption) for large industrial scale of biodiesel production; adequate subsidies from

the central or provincial governments for production. Hainan producers reported that current cost for biodiesel

production is about 10 percent higher than regular diesel.

In June 2011, China’s Ministry of Finance and General Administration of Taxation jointly issued a notice that

temporarily removes the five percent consumption tax for bio diesel producers who use the following feed

stocks: used cooking oil that is not allowed for human consumption, non-edible lipid from the animal

slaughtering houses, leather and meat processing sectors, the acid residue oil from crushers, and other lipids

that are not suitable for human consumption.

Update on Tax Incentives for Fuel Ethanol and Biodiesel Production in 2011

Comparison of Tax Incentives for Fuel Ethanol and Bio-diesel Production

Type Consumption Tax Value Added Tax (VAT)

Fuel Ethanol 0 0

Bio-diesel

5% was removed in 2011 *17%

*Interpretation by local taxation authority varies.

Support programs for forestry feed stock for future bio-diesel production:

The State Forestry Administration (SFA) continues to build demonstration bases for energy forestry, but lack of

additional financial support still hinders plantation. The planned acreage by end of the 11th five year plan

(2006-2010) was 2.0 million acres. However, by end of 2010, only 500,000 acres were actually planted. In

February 2011, SFA announced the guidance on the cultivation of sustainable energy trees such as Jatropha

(guidance for other energy trees will be issued in the future). This guidance explains the definition of “energy

trees” as well as the goal of producing high yield oilseeds. Previously, SFA guided Jatropha plantation as part of

its national forestation program, but the survival rate was the key performance measure, not whether Jatropha

varieties could bear high yield oilseeds.

Revision in Bio-ethanol Production for 2010:

The fuel ethanol production in 2010 is revised to 2,128 million liters (1.68 million tons), down 2 percent from the

previous year. Lower production is mainly due to high grain prices and reductions in subsidies for fuel ethanol.

Table 1: A Historical Look at China’s Fuel Ethanol Production

Year Production Quantity % Increase from

Previous Year

2002 and

before

Official fuel ethanol production began in 2004. There is little

recorded fuel ethanol production before 2002.

N/A

2003 < 25.3 million liters (or 20,000 MT/year)

2004 380.1 million liters (or 300,000 MT/year) 1,400%

2005 1,165.6 million liters (or 920,000 MT/year) 206%

2006 1,647.1 million liters (or 1,300,000 MT/year) 41%

2007 1,736 million liters (or 1,370,000 MT/year) 5%

2008 2,002 million liters or (1,580,000 MT/year) 13%

2009 2,179 million liters (or 1,720,000 MT/year) 8%

2010 2,128 million liters ( or 1,680,000 MT/year) -2%

Source: Industry Sources

Table 2. Current Fuel Ethanol Production

Location

(Province,

City)

Company

Name

Principal

Feedstock

2008

Production

(1000

liters

/year)

2009

Production

(1000

liters

/year)

2010

Production

Capacity

(1000 liters

/year)

Supply

Location

Heilongjiang,

Zhaodong

China

Resources

Alcohol Co.

Corn/Rice 228,060 240,730 253,400 Heilongjiang

Jilin, Jilin Jilin Fuel

Ethanol Co.

Corn 595,490 633,500 570,150 Jilin

Liaoning

Henan,

Nanyang

Henan Tian

Guan Fuel-

Ethanol Co.

Wheat 519,470 561,281 570,150 Henan

Hubei (9

cities)

Hebei (4

cities)

Anhui,

Bengbu

Anhui

BBCA

Biochemical

Co.

Corn 506,800 532,140 557,480 Anhui

Shandong (7

cities)

Jiangsu (5

cities)

Hebei (2

cities)

Guangxi Guangxi

COFCO Bio-

Energy Co.

Cassava 152,040 211,589 177,380 Guangxi

Total: 2,001,860 2,179,240 2,128,560

Source: Industry Sources

Consumption, Trade, and Stocks:

Fuel ethanol production runs in tandem with the mandated use (or planned consumption) prescribed by the

government. This state-running management system prohibits the private sector to import fuel ethanol or

biodiesel despite favorable market prices. Feedstock imports are not currently considered for biodiesel

production. China is the largest importer of oilseeds for human consumption. Oilseeds such as crude palm oil

are not price competitive for biodiesel production without government subsidy. As noted above, the renewable

energy sector often loses when competing against a need for human consumption in China.

Denatured/Undenatured ethanol: China temporarily lowered the import tariff on denatured ethanol (HS code:

220720) to 5 percent in 2010, a drastic decrease from 30 percent in 2009. This tariff cut only benefited imports

of denatured ethanol for chemical use (not fuel consumption). The government tightly controlled domestic

distribution of denatured ethanol, so its use (or demand) has been confined to selected provinces and cities. For

undenatured ethanol, the import tariff remains unchanged at 40 percent. The 17 percent VAT and 5 percent

consumption tax are levied on both denatured and undenatured ethanol. In early July 2010, China announced

the elimination of VAT tax rebates on ethanol and corn starch exports, mainly due to rising domestic grain

prices.

Tariff and Taxes on Ethanol Trade

HS#

Import

Tariff Rate

VAT on

Import

Consumption Tax

on import

VAT Rebate

on Export/1

VAT Rebate

on Export/2

220710 Undenatured 40% 17% 5% 5% 0%

220720 Denatured *5% 17% 5% 5% 0%

1/ Before July 15, 2010; 2/ After July 15, 2010. *Tariff cut is a temporary rate (in 2010, it was 30 percent).

Source: Ministry of Finance

Table 3: Conventional & Advanced Bio ethanol (million liters)

CY 2006 2007 2008 2009 2010 2011

Production 1,647 1,736 2,002 2,179 2,129 2,217

Imports 0 0 0 0 0 0

Exports 0 0 0 0 0 0

Consumption 1,647 1,736 2,002 2,179 2,129 2,217

Ending Stocks 0 0 0 0 0 0

Production Capacity (Conventional Fuel)

No. of Bio refineries 4 4 5 5 5 5

Capacity 1,824 2,065 2,243 2,179 2,357 2,534

Production Capacity (Advanced Fuel)

No. of Biorefineries 0 0 0 0 0 0

Capacity 0 0 0 0 0 0

Co-product Production (1,000 MT)

DDGS 800 800 928 1,000 1,020 1,070

Corn Oil 56 56 65 70 69 72

Wheat Gluten 45 45 45 45 45 45

Wheat Bran 150 150 150 150 150 150

Feed stock Use (1,000 MT)

Corn 3,200 3,200 3,700 4,000 3,900 4,120

Wheat 1,050 1,050 1,050 1,050 1,050 1,050

Cassava 0 0 340 470 392 336

Rice NA NA NA NA NA NA

Source: Industry Sources (Corn to ethanol ratio 3.15, dried cassava’s ratio 2.8, and wheat ratio 3.5.)

Table 4: Conventional & Advanced Biodiesel (million liters)

CY 2006 2007 2008 2009 2010 2011

Production NA NA NA 341 341 341

Imports 0 0 0 0 0 0

Exports 0 0 0 0 0

Consumption 0 0 0 less than

170

less than

150

less than

150

Ending Stocks 0 0 0 0 0 0

Production Capacity (Conventional Fuel)

No. of Biorefineries NA NA NA 10 10 10

Capacity 0 0 0 0

Production Capacity (Advanced Fuel)

No. of Biorefineries 0 0 0 0 0 0

Capacity

Feed stock Use (1,000 MT)

Spent Kitchen Oil NA NA NA NA NA NA

Waste Residue from Oil Crushing

Plants NA NA NA NA NA NA

Source: Industry Sources

Advanced Bio-Fuels:

Sustainable Aviation Fuel Cooperation between China and United States: In January 2011, a Memorandum of Understanding was signed between Chinese and U.S. companies on the US-

China International Trans Pacific Sustainable Aviation Bio-Fuel Flight. To supply biodiesel for a demonstration

flight in China, the Chinese government designated China’s National Petroleum Cooperation (Petrochina) to

develop biodiesel production using Jatropha. Reportedly, the demonstration flight is scheduled in the second

half of 2011. PetroChina is working actively with State Forestry Administration and provincial governments to

develop Jatropha production in Sichuan and Yunnan provinces. Jatropha trees were planted in these provinces

since 2006; however, due to poor management and growing conditions on marginal land, most trees are still in

early stages of development and are not sufficient for large scale production for industrial use. Sources have

noted that, in June, Petrochina provided 15 tons of biodiesel to a U.S. company for further processing, which,

reportedly, has been the largest production (to date) for this pilot program. For this delivery, around 50 tons of

Jatropha seeds were processed. PetroChina is looking for new high-yielding Jatropha varieties and has invested

in demonstration farms. If successful, PetroChina will increase Jatropha production in coming years.

Sweet Sorghum:

Industries view sweet sorghum as a non grain feed stock, suitable for production on marginal land, which does

not compete with crop for human production. Some provincial governments have been lobbying the central

government to approve sweet sorghum as feedstock for new ethanol plants. Researchers are improving the

yield and fermentation procedures, while provincial governments are funding small scale demonstration

projects. Due to its high biomass output, sweet sorghum is also considered a potentially ideal crop for cellulosic

ethanol production.

Agricultural residues such as crop straw/stalk and forestry residues are the two main feed stocks for cellulosic

ethanol. In June 2011, National Development & Reform Commission (NDRC) released Guidance Catalogue for

Industry Structural Adjustment. This new catalogue replaces the 2005 catalogue and functions as a guide to

investment management. It is used as an important reference in implementing financial, tax and trade policies.

According to this catalogue, the government encourages technology development and application for biomass

cellulosic ethanol and bio diesel from non-grain feedstock.

In July 2010, the government granted 22 national energy research centers to promote renovation in energy

sector and integrated efforts between research and industry. Among them, the government granted National

Energy R&D Center for Liquid Biofuel. In 2011, the government plans to grant another national research center

on bio fuels based non- grain feed stocks. The establishment of these centers highlights government

commitment for breakthrough in technology in sustainable biomass energy.

Following a 2007 Memorandum of Understanding between U.S. and China to establish a partnership on bio-fuel

research and development, government officials, researchers, and private companies from both sides have been

working together to discuss technology and research on shared interests and challenges. In 2011, the U.S.

Departments of Agriculture and Energy and China’s National Energy Administration (NEA) agreed to conduct

technical exchanges and site visits focusing on establishing an efficient, coordinated and sustainable supply

system of non-food biomass feedstock. The two sides are planning to focus on the progress of feedstock

research and development for the second generation liquid biofuel at the 2011 Sino-US Advanced Biofuels

Forum. Topics discussed will include, but not limiting to, sustainable development of feed stocks for crop and

forest residues, herbaceous, woody non-food energy crops, and microalgae for biodiesel.

Auto market and Fuel use in China:

Auto sales in China in 2011 are estimated to grow over 15 percent. Due to rising fuel prices, car manufactures

and consumers are turning to more energy efficient car, as the same time, government encourages renovation

in electricity cars. FAS/Beijing estimates that transport fuel (diesel and gasoline) demand will grow 5 percent in

2011. Diesel is the primary fuel consumed in China with close to 156,768 million liters (or 138 MMT) consumed

in 2009. Gasoline consumption was approximately 78,200 million liters (61 MMT in 2009). Both diesel and

gasoline consumption in China have increased substantially as China’s economy expands.

China Ethanol Exports in 2005-2011 in 1,000 LTR

HTS# Description 2005 2006 2007 2008 2009 2010 2011

Total

Ethanol 162,204

1,017,7

79

129,97

3

108,11

0

107,89

5

156,02

0

19,16

9

22071

0

Undenature

d 158,654 970,721

110,71

8

100,06

4 91,787

143,74

0

16,60

7

22072

0 Denatured 3,550 47,058 19,256 8,047 16,108 12,280 2,562

China Ethanol Imports 2005-2011 in 1,000 LTR

HTS#

Descriptio

n 2005 2006 2007 2008 2009 2010 2011

Total

Ethanol

19,59

0 7,972 678 402 159 3,611 3,850

22071

0

Undenatur

ed

15,93

6 5,930 154 293 28 392 68

22072

0 Denatured 3,654 2,042 524 109 130 3,220 3,783

Data for 2011: Jan-May 2011

Source: World Trade Atlas

China

Exports 220710, Undenatured in 1000 LTR 220720 Denatured in 1,000 LTR

Partner

Country

Quantity Partner

Country

Quantity

2008 2009 2010 2008 2009 2010

World 100,064 91,787 143,740 World 8,047 16,108 12,280

Korea

South 32,599 50,336 80,636

Korea

South 2,334 8,199 4,825

Philippines 4,297 2,464 19,064 Taiwan 4,449 3,478 3,890

Taiwan 10,106 10,230 17,422

Korea

North 238 10 3,207

Japan 12,560 11,174 14,743 Macau 327 176 196

Korea

North 8,230 3,272 4,340 Singapore 625 0 56

Australia 17,685 3,705 3,699

United

Arab

Emirates 0 97 49

China

Imports 220710, Undenatured in 1,000 LTR

220720, Denatured in 1,000

LTR

Partner

Country

Quantity Partner Country Quantity

2008 2009 2010 2008 2009 2010

World 293 28 392 World 109 130 3,220

United

Kingdom 0 0 160 Indonesia 0 0 3,004

Myanmar 0 0 146 Japan 81 99 140

Netherlands 0 0 46 United States 11 23 32

Japan 49 10 13 Brazil 0 0 24

Germany 18 9 12 Netherlands 7 6 9

United

States 2 1 12 United Kingdom 1 2 6

Source: World Trade Atlas